Project Merlin fails small business lending test

Britain's taxpayer-backed banks should be run on "non-commercial grounds"
if the Government is serious about improving the supply of credit to smaller
businesses, according to a leading investment bank.

Under the terms of the deal, the banks involved, which includes Barclays, Lloyds Banking Group and Royal Bank of Scotland are required to show a "capacity and willingness to lend" £190bn this year, of which £76bn must be to small and medium-sized businesses.Photo: Homer W Sykes / Alamy

Analysts at Citigroup criticised the Project Merlin deal between the Government and the UK's largest banks saying it had failed to achieve any "genuine overall improvement in the availability and cost of credit for small firms".

"Project Merlin appears to be a classic case of "managing to the target", a familiar pattern whereby a numerical target is set, numbers are produced showing the target is achieved, but the underlying reality is not greatly changed," said Citigroup.

Under the terms of the deal, the banks involved, which includes Barclays, Lloyds Banking Group and Royal Bank of Scotland are required to show a "capacity and willingness to lend" £190bn this year, of which £76bn must be to small and medium-sized businesses.

The latest Project Merlin figures from the Bank of England show that the lenders have made available £158bn of new lending, or 83pc of the total, putting them on track to hit the target before the end of the year.

Progress on SME lending has been slightly slower and the Bank's figures show that £56.1bn has been available to smaller business, or three-quarters of the total.

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The affect of this on the actual availability of credit to business has been "poor", according to Citigroup, which point out the size of outstanding credit facilities to non-financial firms has fallen by nearly 4pc year-on-year to £23.3bn, while net lending to SMEs is down 3.3pc.

"We suspect that, in aggregate, banks are meeting their Project Merlin targets by making credit available at a high price and on tough terms that few firms can afford to meet.

"We suspect that the cost and availability of credit for small firms will remain poor unless the government take a far more proscriptive and forceful approach to the banks (e.g. running the nationalised banks on non-commercial grounds, ordering them to lend more to small UK firms at low rates, and if necessary changing the management to achieve this)," said Citigroup.

RBS is 84pc owned by the state, while 41pc of Lloyds shares are in the hands of the authorities, however politicians have insisted ever since the banks' multi-billion pound bailout in late 2008 that the government wanted them to continue to be run as for-profit businesses.

There have been repeated calls for the government to use it shareholdings to force the banks to provide more lending to smaller businesses, however the authorities have always argued that to force the lenders to make loans available on non-commercial terms would harm the longer-term valuation of the banks.

George Osborne, the Chancellor, has announced a series of initiatives and funds designed to help provide more financing to businesses that have found it harder to secure credit and earlier this month Stephen Hester, chief executive of RBS, launched a three-month programme to increase small business lending.